Avoid 40% and what to do if that's not feasible

TMSG

(Health Warning: many numbers ahead )

So I'm trying to prepare for the moment where the wife starts to get her SP and various company pensions. As things stand right now, the sum of all her tax-relevant incomings minus the allowances will be just below the higher rate threshold. We have a pretty good idea about her expected pension payments and the savings interest she'll get although her dividend income is a bit less clear: if she gets some bumper payouts that's good of course but she could just jump over the threshold which is not so good (BTW the interest/dividend payments are only those from her non-ISA accounts). So we're putting some more money into ISAs but unfortunately I can't give her 10% of my PA as I'm a basic rate tax payer. So far, so good.
However, as the various allowances are frozen until at least 2028, there's a good chance that she'll sooner or later turn into a higher rate tax payer. And then the fun starts as I have no clear, firm picture how this'll work out. My understanding is that she'll pay 40% for all non-dividend income above the threshold (and not forgetting the reduction from £1000 to £500 for the Savings Allowance). Then there's the jump from 8.75% to 33.75 for dividends and that's where I am not sure. So let me give some rough numbers... we start with £30k from her pensions, £11k from savings and £7/8k from dividends. That's within the PA + 20% band and I *think* she'll pay 20% on £30k+£11k-PA-£1000 and 8.75% on £7/8k-£500.
But what when the numbers change? Say a few years later her pensions are at £33k, the savings at £14k and the dividends at £11k, still with current allowances in place. My understanding is that she can allocate her PA as she sees fit (though not the rest of her income).
Would it be wise then to allocate her PA first to the £11k dividends and the rest to the other income? Probably not as 8.75% is less than 20% and 33.75 is less than 40%. OTOH, if we allocate all her PA to the non-dividend income, then she'll have to pay at least for some of the dividends 33.75% instead of 8.75%. I am not clear what the best allocation strategy is in this case so I've done two quick'n'dirty calculations with non-dividend income as pensions £33k + interest £14k=£47k and dividend income as £11k:
Case 1, the PA goes fully to Non-dividend income: (47,000-12,570-500)*20%=6786. She's left a basic rate allowance of 50,270-47,000=3,270 for the first part of the dividend income so 3,270*8.75%=286. She's left dividend income of (11,000-3,270-500)*33.75%=2,440. Total=6,786+286+2,440=9,512.
Case 2, the PA goes first to dividend income: (11,000-500)*8.75%=918. She's left a PA of 2,070 plus 500 Savings Allowance so she pays tax on 46,500-2,070=44,430 or 37,700*20% + (44,430-37,700)*40%=10,232. Total=11,150.
So it appears that case 1 is better for her. Does that make sense? If so, will the HMRC SA calculation pages do the case 1 calculation as a matter of course or do we have to do something? All input welcome!

tacpot12

Does she have the opportunity to move some savings and investments to ISAs over the next few years? 

etienneg

Those who are married (or in a civil partnership) can "gift" money to each other without limit and with no tax involved. So, if you pay tax at basic rate it may help for her to "gift" you money so that you can put it in savings accounts (or whatever) and earn interest, rather than her earning the interest. Do you use your full £20,000 ISA allowance every year? And your £1,000 PSA? If not, that would mean no tax (or at worst a reduced amount of tax) on the interest. Of course, this would push you nearer the higher rate threshold, but it's something to consider.

TMSG

Thanks for that. Yes, she's planning to put some of her money into another ISA but she's got a feeling that the ISA route might close in the future. And whether she might "gift" me some money IDK.
The question for us and the main reason for my OP is whether my understanding of the PA allocation and the calculations based on it makes sense.

S2929

One of the best options is for her to gift some/all of the non-ISA held stocks to you, such that you get the dividends.
(And also if/when eventually selling so you can utilize you Capital Gains allowance)

TMSG

Sigh. It seems impossible to get an answer to the question(s) in my OP.
So I have googled and googled and it's clear that:
a) in theory the PA can/will be allocated in whatever way is most beneficial to the tax payer. In practice even HMRC advisers don't always know that's the case (I can vouch for HMRC admins on their own personal taxation forum to give inaccurate answers a few times and I've now stopped posting there).
b) in theory the HMRC SA web pages should do the necessary calculations automatically in the background and give the "best outcome" but apparently there was a big problem (aka bug) in the past that took a long time to resolve and required people to send in paper returns instead
c) a few of the 15 to 20 web pages I've read seem to advise to do the calculations and to triple-check the SA outcome as even today there seem to be corner cases where the HMRC calculations simply don't work correctly
d) a common refrain was that HMRC is not capable to understand its own tax rules (quote: "It's a national embarrassment that the UK national taxing authority doesn't understand tax and can't calculate it correctly. HMRC are a disgrace."). If even they can't do it correctly...

Dazed_and_C0nfused

From your original post,

but unfortunately I can't give her 10% of my PA as I'm a basic rate tax payer.

That isn't necessarily correct.  If you would remain a basic rate payer then you are perfectly entitled to apply and if neither of you are higher rate payers then you would be eligible.

But as the recipient doesn't receive any extra Personal Allowance, just a tax reduction of £252 it is highly unlikely to be worth it from a tax saving perspective as you would likely pay £252 extra to save her £252.

Dazed_and_C0nfused

However, as the various allowances are frozen until at least 2028

I suspect the only allowance she can benefit from is the Personal Allowance.

And then either two or three 0% tax bands (savings starter rate, savings nil rate (aka Personal Savings Allowance) and dividend nil rate (aka Dividend Allowance).

Dazed_and_C0nfused

But what when the numbers change? Say a few years later her pensions are at £33k, the savings at £14k and the dividends at £11k, still with current allowances in place. My understanding is that she can allocate her PA as she sees fit (though not the rest of her income).
Would it be wise then to allocate her PA first to the £11k dividends and the rest to the other income?

That doesn't seem sensible to me.  Why would she want to give up the ability to use the dividend nil rate band?

Also, even if she only allocated £10,500 of her Personal Allowance to the dividend income then wouldn't that result in ~£7k of interest being taxed at 40% when that ~£7k could be taxed at 33.75%

Or maybe I'm missing some key part of your strategy?  Or maybe just an overly complicated post!

Dazed_and_C0nfused

non-dividend income as pensions £33k + interest £14k=£47k and dividend income as £11k:
Case 1, the PA goes fully to Non-dividend income: (47,000-12,570-500)*20%=6786. She's left a basic rate allowance of 50,270-47,000=3,270 for the first part of the dividend income so 3,270*8.75%=286. She's left dividend income of (11,000-3,270-500)*33.75%=2,440. Total=6,786+286+2,440=9,512.

I don't think your calculation is correct.

If the PA is used against non savings non dividend income that leaves 20430 to be taxed at 20% (4086.00)

Then the savings interest is taxed 500 x 0% + 13500 x 20% (2700.00)

Total tax due at this point = 6786.00

The first 500 of dividend income is taxed at 0% and this uses some of the remaining basic rate band.  The next 2770 of dividend income is taxed 8.75% (242.37)

At this point the total basic rate band used is 20430 + 500 + 13500 + 500 + 2770 = 37700.

The final 7730 of dividend income is taxed at 33.75% (2608.87).

Total tax is 4086.00 + 2700.00 + 242.37 + 2608.87 = 9637.24

Have you considered pension contributions to mitigate the higher rate tax liability?  Limited to £3,600 (gross) but still very tax efficient.

Dazed_and_C0nfused

Case 2, the PA goes first to dividend income: (11,000-500)*8.75%=918. She's left a PA of 2,070 plus 500 Savings Allowance so she pays tax on 46,500-2,070=44,430 or 37,700*20% + (44,430-37,700)*40%=10,232. Total=11,150.

I can honestly say I have no idea what you are on about here.

On one hand you appear to want to allocate some of the Personal Allowance to the dividend income.  But then you charge 8.75% tax on that same income

That is a new concept I don't think HMRC have been told about yet 😳.

I'm hoping it doesn't catch on as I quite like having £12,570 of income which isn't taxed.